Definitions and Types of Entrepreneurship in Developing Countries Part I

Acs and Virgill observed that the term “entrepreneurship” is often used in several different ways when discussed in connection with developing countries. For example, studies of entrepreneurship in developing countries often focus explicitly and primarily on “small- and medium-sized enterprises” (“SMEs”). In other cases, discussions of entrepreneurial activities in developing countries include persons and firms found in the “informal sector” as well as those engaged in “petty capitalism”. In many cases, combining firms in the informal sector with SMEs in developing regions such as Africa results in a large group of small traders which is collectively responsible for 65%-70% of total GDP and this means that efforts to study and incentivize entrepreneurial activities in developing countries must take into account firms operating both inside and outside the formal institutional framework. Petty capitalism can be found in many forms and has been described as including “small businesses which employ relatively few employees and rely heavily on their owner’s and owner’s family’s labor”. Acs and Virgill cited several examples of petty capitalism including the numerous export enterprises of Hong Kong, the maquila workshops in Mexico and furniture manufacturers in Italy.

The terminology landscape in developing countries clearly contrasts with the approach taken by scholars of entrepreneurship in the US and other developed countries—they make a strong distinction between entrepreneurship and SMEs based on their intentions with respect to growth; however, in developing countries it is generally advisable to adopt a broader definition of entrepreneurship that includes SMEs, the informal sector, petty capitalists and the relatively rare dynamic entrepreneur given that each of these actors is capable of generating something that is “new” in what Schumpeter probably meant when he referred to “the humblest levels of the business world”.

Studies of entrepreneurship in developing countries have often focused extensively on distinctions between “necessity-based” and “opportunity-based” entrepreneurs, which is often viewed as a distinction between proprietors who start their own businesses when no other options are available in order to find a way to sustain their families and persons who start businesses with the intent of not only bringing in sufficient income to support themselves and their families but also to generate excess capital that can be reinvested in order to underwrite business growth and development. The lack of institutions in many developing countries often results in a shortage of formal employment opportunities in those countries and leaves substantial portions of the population with little choice but to set out on own. So-called “reluctant entrepreneurship” of this type also follows loss of employment, which may be caused by one of the frequent economic shocks that developing countries are prone to suffer. Several extensive studies of global entrepreneurship, including the Global Entrepreneurship Monitor, commonly referred to as the “GEM”, and the Global Entrepreneurship and Development Index, have provided additional information on entrepreneurial types in developing countries, the factors that have motivated them to choose and pursue entrepreneurship and the impact that economic development is likely to have on the face of entrepreneurship in those countries.

In my next post I’ll discuss some of the factors that make entrepreneurship in developing countries “different” than what observers in the West are used to.

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